2021 (12) TMI 155 - Tri - Insolvency and Bankruptcy

Tribunal Rules Shareholder Not a Financial Creditor under IBC 2016

Hubtown Limited Versus GVFL Trustee Company Pvt. Ltd. And GVFL Trustee Company Pvt. Ltd. Versus Hubtown Limited

The Tribunal held that GVFL Trustee Company Pvt Ltd did not qualify as a Financial Creditor under the IBC 2016 as it was a shareholder, not a lender. The ... Maintainability of application - initiation of CIRP - Corporate debtor failed to make repayment of its dues - Financial Creditors - Financial Debt or not - as per the Petitioner there is a default under Section 7 of IBC, 2016 as its “put option” was not entertained when the said demand notice dated 02.01.2018 was sent to the Respondent M/s. Hubtown Limited demanding exit by way of “put option” - HELD THAT:- The Bench notes that as per the SHA, GVFL invested in HBT Mehsana by purchasing the shares of ILFS group. This cannot be termed as an investment of GVFL by way of a loan. The money paid by GVFL to acquire the share of HBT Mehsana cannot be construed as a consideration for time value of money and it was solely for the purchase of shares of HBT Mehsana held by ILFS group to become a shareholder in the Company. The Bench also notes that as per shareholder of HBT Mehsana, GVFL had acquired various rights including that of appointing a Director, exercising votes in AGM/ EGM and exercising veto votes. It is abundantly clear to the Bench that no voting rights ever accrues to a Financial Creditor in any AGM/ EGM. The rights enjoyed by GVFL in HBT Mehsana like exercising votes in the AGM/ EGM are typically the rights of a Shareholder and not a Financial Creditor. This is because, Equity is not a debt and as such any contract for acquisition of shareholding in a body corporate can never result in the formation of a debt. The SPA and SHA are both contracts in relation to GVFL acquisition of equity shareholding in HBT Mehsana. The Bench is of the view that share purchase in HBT Mehsana by GVFL with exit option of inter alia “Annual Put Option” cannot be considered as a debt which is disbursed against consideration of time value for money. The Bench also notes that Internal Rate of Return (IRR) cannot be equated with interest payments. The relevance of IRR for an investor in shares is in relation to expected profit and dividend pay out and capital appreciation of the shares which is totally different to the interest which is return for any investment by way of loan - GVFL may be entitled to this claim under the SHA as a Shareholder of HBT Mehsana. However, the Bench has no doubt that the claim of GVFL cannot be termed as a Financial Debt as contemplated under IBC. Application allowed. Issues Involved:1. Whether GVFL Trustee Company Pvt Ltd (GVFL) is a Financial Creditor under IBC 2016.2. Whether the debt claimed by GVFL is a Financial Debt as per IBC 2016.3. The maintainability of the Section 7 Petition filed by GVFL against Hubtown Limited.Issue-wise Detailed Analysis:1. Whether GVFL Trustee Company Pvt Ltd (GVFL) is a Financial Creditor under IBC 2016:The Tribunal examined whether GVFL qualifies as a Financial Creditor under Section 5(7) of the IBC 2016. According to the IBC, a financial creditor is defined as 'any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred.' The Tribunal found that GVFL, being a shareholder, is distinct from a lender. Shareholders invest in shares and derive returns through dividends and capital gains, whereas lenders receive interest payments on loans. The Tribunal concluded that GVFL, as a shareholder, does not qualify as a Financial Creditor.2. Whether the debt claimed by GVFL is a Financial Debt as per IBC 2016:The Tribunal analyzed whether the debt claimed by GVFL constitutes a Financial Debt under Section 5(8) of the IBC 2016, which defines financial debt as a debt disbursed against the consideration for the time value of money. The Tribunal noted that GVFL's investment in HBT Mehsana was through the purchase of shares, which cannot be considered a loan or a disbursement against the time value of money. The Tribunal emphasized that the Internal Rate of Return (IRR) claimed by GVFL is related to expected profits and dividends, not interest payments. Therefore, the Tribunal concluded that GVFL's claim does not meet the criteria of a Financial Debt under IBC 2016.3. The maintainability of the Section 7 Petition filed by GVFL against Hubtown Limited:The Tribunal considered the maintainability of the Section 7 Petition filed by GVFL, which sought to exercise its 'put option' under the Share Subscription and Shareholders Agreement (SHA). The Tribunal noted that the rights enjoyed by GVFL, such as voting in AGMs/EGMs and appointing a director, are typical shareholder rights and not those of a Financial Creditor. The Tribunal concluded that the share purchase by GVFL with exit options like the 'Annual Put Option' cannot be considered a debt disbursed against the consideration of the time value of money. Consequently, the Tribunal held that the claim of GVFL does not qualify as a Financial Debt under IBC, and the Section 7 Petition is not maintainable.Judgment:The Tribunal allowed MA 2412/2019 regarding the maintainability of CP(IB)-4129/2018 and dismissed the Company Petition CP No. CP(IB)-4129/2018 under Section 7 of IBC as not maintainable. Similarly, based on the above findings, the Tribunal also allowed other MAs viz. MA 2411/2019 in CP 4128/2018, MA 2413/2019 in CP 4130/2018, and MA 2414/2019 in CP 4131/2018, and dismissed the Company Petitions No. CP(IB)-4128/2018, CP(IB)-4130/2018, and CP(IB)-4131/2018 filed under Section 7 of the IBC as not maintainable.